Stocks:
The
move to a lower low on Friday puts the odds squarely in the “one more
leg down” camp. I’ve noticed a couple of patterns emerging in the
stock market. The first one is the tendency for a market cycle to bottom on
an anticipated news event. The last two intermediate cycle lows bottomed on
or one day prior to a jobs report.
The
second is the tendency for a cycle to bottom only after a fake out earlier in
the cycle.
I’ve
been expecting a short daily cycle to balance out the extremely long cycle
into the May flash crash (62 days trough to trough). But it doesn’t
look like we are going to get one. Every cycle has either run late into the
timing band or stretched long. So from here on out I won’t be looking
for any more short cycles (which probably guarantees the next one will be).
So if
we factor in the fake out principle and news driven bottom theory we are probably
looking at the current daily cycle bottoming this week, possibly Friday (day
40) on the GDP revision. Lately the daily cycles have tended to run between
35 and 45 days with 39 or 40 being the norm.
I
think we all realize the revision is going to be bad and common sense would
suggest the market should go down. However the market is already in the
process of discounting a bad number and has been for almost two weeks now. I
suspect this is going to be one of those sell the rumor buy the news type
events. And I expect it is going to catch the bears leaning heavily in the
wrong direction expecting the market to act rationally and continue down.
When
the market starts to rally out of that cycle bottom we could see a pretty
aggressive move as shorts panic and have to cover. I actually expect this
will quickly drive the market above the 1130 resistance level. Then it will
just be a question of when sentiment reaches bullish extremes as to whether
the market can test the April highs. If we start to see large negative money
flows (a sign institutional traders are exiting) prior to bettering the
April high then there is a good chance the cyclical bear is on its last legs.
Dollar:
I’m
going to spend a good bit of time today on the dollar because it is going to
be the key to what I envision unfolding over the next few months.
I’m
going to start off with the largest 3 year cycle and then work backwards.
The
last four major 3 year cycles have all run 3 to 3 1/2 years in length. The
current cycle is 2 years and 6 months old. Now there is a chance the 3 year
cycle could bottom this fall as the current intermediate cycle bottoms.
However that cycle is due to bottom in November or early December. That would
leave the 3 year cycle a bit short. For that reason I expect the current
cycle to run at least one more intermediate cycle into the March – June
time frame. This is a big reason why I think the C-wave in gold may have two
additional legs up instead of just one.
Next,
let’s back down to the next smaller cycle – the yearly cycle.
I’ve
marked the last two yearly cycles in blue (notice how they are making lower
lows). The last two yearly cycle lows occurred in December. The current
intermediate dollar cycle should bottom in late November or early December.
That skews the odds heavily in favor of the next intermediate cycle low not
only marking an intermediate bottom but also forming a higher degree yearly
cycle bottom in the same ‘end of the year’ time frame as the last
two yearly cycles.
After
the aggressive collapse we’ve seen in the dollar over the last couple
of months, there seems to be little question the dollar has begun working its
way down into that yearly cycle low. The only question now is how long before
the current intermediate cycle (which began on August 8th) tops. I suspect it
will be fairly quickly. As a matter of fact I think the current
daily cycle will most likely be the last right translated daily cycle
imbedded within the current intermediate cycle.
Once
this daily cycle tops, which I expect it to do next week or early the week
after, there is a very good chance that will also mark the top of this
intermediate cycle. As I’ve illustrated on the chart, I then
expect every daily cycle after that to be left translated (tops in less than
10 days), and each to move below the prior cycle low (failed
cycle) until the dollar puts in the yearly cycle low later this
winter.
It’s
been my contention for some time that the only way stocks can rally is if the
Fed continues to debase the currency. Remember, this is an election year so I
think we can pretty much bank on the dollar moving down into the yearly cycle
low right on schedule, possibly with extreme prejudice as Ben
desperately tries to keep asset prices inflated into the elections.
But as I’ve
been saying for a long time it simply isn’t possible to print
prosperity. I’ll tell you what else is impossible
to control - where the liquidity lands.
Ben
would love for all that free money to create jobs, but as we know that just
ain’t gonna happen. The next best thing would be for all that liquidity
to levitate the stock market. And I think it will to some extent, but there
are already problems starting to surface with this plan. Not surprisingly
they are the same problems that popped up in `08 as Ben tried to stop the
real estate bubble and credit markets from collapsing. I’m sure
you’ve noticed the problem by now. That’s right; liquidity
is leaking out of the stock market and flowing into the commodity markets.
It’s
readily apparent in the above chart that stocks are already struggling as
more and more liquidity leaks into commodities. The CRB however is having no
trouble what-so-ever responding to the Fed’s printing press. It is
rising in lock step with the declining dollar. The fact that the fundamentals
are impaired in most commodities just goes to show how much liquidity the Fed
is actually dumping on the world.
I
expect this pattern to continue and accelerate as the dollar moves into the
yearly cycle low. I have no doubt we will continue to see a weaker and weaker
response from the stock market leading to more and more panic printing by the
Fed causing commodities prices to rise and rise.
Commodities
are already trying to tell Ben to shut down the presses. As this continues
they will soon be screaming for the Fed to shut off the money
spigot. I really don’t expect Ben to hear though. He was deaf to
what his monetary policy caused in `08 ($147 oil and the collapse
of the economy) and I expect he will not heed the warning signs this time
either. This, of course, just means he will get the same result as
last time. Eventually his monetary policy will spike commodity prices,
especially oil and probably food, through the roof which will destroy the
economy all over again.
Gold:
I’ve
been looking for a swing high to possibly mark the top of the current daily
cycle. Gold formed a swing on Friday that I think probably marked a short
term top. If gold is now on its way down into the daily cycle low then I tend
to think it will probably bottom along with the stock market
sometime this week or early the following week.
My
best guess as to how far the correction drops would be at least 50% of the
recent rally. Most daily cycles do tend to give back at least 50%.
A 50%
retracement would take gold slightly below $1200. If you remember I was
expecting smart money to push gold below the May pivot as the
intermediate cycle bottomed last month. I explained at the time
how big players routinely run stops to trigger heavy volume sell
offs that allow them to take large positions into a very liquid
environment. With the benefit of hindsight we know this is
exactly what happened.
Now I
don’t think gold will be dropping anywhere close to $1155 during this
correction, but I do think there are probably plenty of stops to be run below
the psychological $1200 level. So I think we can probably look for gold drop
below that briefly as smart money again runs the stops in order to panic
retail traders into puking up their shares. My suggestion would be for anyone
looking to enter or add to positions to do so as gold breaks through $1200.
Let
me remind everyone that gold is the single strongest trending market on the
board today. It is the only asset still in a secular bull market with
unimpaired fundamentals. The dollar is the key here also. Every C-wave
advance so far has been driven by a major leg down in the dollar and I
don’t think this one will be any different. I expect the final two legs
up in this C-wave will be driven by the dollar falling into the yearly cycle
low later this year and the 3 year cycle low next spring.
I did
my best last month to convince traders and investors to buy the intermediate
cycle low. I suspect many were unable to do so. Those intermediate cycle lows
are the single best buying opportunities one gets in bull markets and they
only come around once every 5-6 months.
The
approaching smaller daily cycle low will be the next best opportunity to get
long or add to positions in the one remaining secular bull market. If you
missed the last cycle bottom in July I suggest you not make the same mistake
twice.
Toby Connor
Gold Scents
Toby
Connor is the author of Gold Scents, a financial blog with a special emphasis
on the gold secular bull market. Mr. Connor's analysis skill of the markets
is largely self-taught, though he admits to being an avid reader of Richard
Russell and Jim Rogers, among several others. Toby is an avid rock climber
and world class weight lifter (for his age). Toby's premium service includes
daily reports and an extensive weekend report.
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